THE JOINT LIQUIDATORS OF CHARK FUNG SECURITIES CO. LTD. AND OTHERS v. CHAN KWONG HUNG

CACV 615/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 615 OF 2000

(ON APPEAL FROM HCCW NOS. 362, 364 & 365 OF 1998)

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J U D G M E N T

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Hon Rogers VP:

1. This is an appeal from a decision of Cheung J given on 22 September 2000. In accordance with the provisions of section 221 of the Companies Ordinance, Cap. 32, the judge ordered that Mr Chan Kwok Hung be examined on oath before a Master of the High Court. The order that the judge made was that the respondent, Mr Chan, should be provided with questions to be asked together with relevant documents one month before the date fixed for the examination.

2. For the purposes of this appeal it is necessary to give a brief history leading up to this appeal.

3. The applicants are the Joint Liquidators of four companies. The four companies were put into liquidation by winding up orders in July 1998. The companies were part of the group of companies called the Ming Fung securities group. Provisional Liquidators had been appointed in May of that year. Their clients were principally small local investors. The Securities and Futures Commission had investigated the companies in May 1998. Mr Chan was interviewed by the SFC on 23 May 1998. It is apparent from the evidence that Mr Chan made an admission, when he attended the SFC's offices, that he had misappropriated something in the region of HK $80 million. It was as a result of that that the SFC presented a petition under the provisions of section 45 of the Securities and Futures Commission Ordinance.

4. After their appointment, two things became clear to the liquidators. The first is that the leading figure in, and the person who had been in charge of, the four companies was Mr Chan. The second is that the liquidators could not then, and still today cannot, discover what lay behind all transactions of the companies. The books and records, in so far as they were in the liquidators' possession, could not reveal the necessary information. One of the notable features of the winding up is that there was found to be a shortfall of the stock held by the companies on behalf of their clients of approximately HK$246 million in value.

5. There were also found to be a number of transactions in which it appeared that money had been transferred from the companies either to various entities of which Mr Chan was a partner or to his wife or to another company in which Mr Chan held an interest. In view of the type of business with which the companies were concerned, the number of small investors who were the companies' clients and the significant amount of deficiency of the stock held on behalf of the clients, the liquidators considered that it was important that they should invoke the jurisdiction of section 221 of the Companies Ordinance and seek to question Mr Chan.

6. On 4 February 1999 a summons was issued seeking liberty to examine Mr Chan. The summons also sought the production of all books, correspondence and documents in Mr Chan's possession or power relating to the Companies.

7. The summons was not heard until 6 December 1999. The outcome of that hearing was that the matter was adjourned so that questions could be served upon Mr Chan with a view to his answering them without having to attend an examination. The questions were served on 26 January 2000. There were some 62 questions in all. Answers to those questions were provided on Mr Chan's behalf on 11 September 2000. It did not take the liquidators long to appreciate that the answers to the questions were unsatisfactory. As a result, the matter was restored to court. Mr Justice Cheung heard the renewed application on 22 September 2000.

8. Before us, Mr Hung, on behalf of Mr Chan, challenges the order on the basis that it was wrong in principle. The point taken in the notice of appeal, and the first point taken by Mr Hung, is that Mr Chan is being sued as one of the defendants in a High Court action. The High Court action in question is a consolidated action. The action is on behalf of three of the four companies in liquidation. The 1st defendant in that action is a firm of which Mr Chan is a partner. The 2nd defendant is Mr Chan's wife. The 3rd defendant is a company of which Mr Chan is a director and shareholder. It is unnecessary to set out the details of that action save to say that the claim made by the liquidators of the three companies is that there were substantial payments made to the defendants. The issue which arises in the action is that although the defendants admit that there have been substantial payments to themselves, it is said that those payments were made as part of a series of connected transactions which included payments back to the plaintiff companies. It is said that the reason for those transactions was that the defendants in the action had access to ready funds. As a result, the defendants were in a position to put the plaintiff companies into immediate funds without those companies having to wait for banking delays for funds to be cleared and made available to them.

9. Before the master, and before the judge on appeal, the liquidators succeeded in obtaining summary judgment against the defendants for various sums of money. When the matter came before this court last July the case against the defendants was not put upon the basis that the defendants had been dishonest. It was clear, however, that there had been a multitude of transactions that needed to be investigated. Whilst the defendants admitted that they had received various sums of money from the companies in question, their defence was that they had reimbursed the companies. Since it was impossible, on the material then before the court, to come to any concluded view as to what balance was owing to the plaintiff companies, this court discharged the summary judgment against the defendants and ordered that there should be an account taken.

10. Mr Hung put his client's case on the basis that it was wrong in principle that an examination should be ordered whilst the High Court action was in being. In support of his submission he relied upon the decision in the House of Lords in In re British and Commonwealth Plc. v. Spicer & Oppenheim [1993] AC 426. That was a decision in respect of section 236 of the Insolvency Act 1986. There is no dispute, however, that the basis upon which the discretion under that section should be exercised is the same as in relation to section 221 of the Companies Ordinance.

11. It is clear from reading the speeches in that case that no such principle, as was contended for by Mr Hung, was held to exist. All the other Law Lords agreed with Lord Slynn's speech. He said that one of the purposes for the section is to enable the company's knowledge to be reconstituted. It was made clear, however, that that was not the sole purpose of the section. It was recognised that the section gave an extraordinary power. It was said that the discretion must be exercised after a careful balancing of the factors involved. On the one hand there were the reasonable requirements of the liquidators and on the other hand there was the need to avoid making an order which was wholly unreasonable, unnecessary or oppressive to the person concerned. The person seeking the order had to satisfy the court that, after balancing all the relevant factors, there was a proper case for the order to be made. In the circumstances, a proper case is one where the person seeking the order reasonably requires either to see the documents or to conduct the examination in order to carry out his functions.

12. Lord Slynn referred to what he said was the careful and detailed investigation of the factors relating to the exercise of the discretion which had been set out in the judgment of Ralph Gibson LJ in the Court of Appeal. Those factors are set out in the judgment of the Court of Appeal [1992] Ch 342 at page 370-2. I do not propose to set out those factors here. I would note that one of the matters that will be taken into account is, of course, the risk of oppression. Gibson LJ said that if the giving of the information that was sought would expose the third party to a risk of liability it would involve an element of oppression. Moreover, if someone were suspected of wrongdoing, and in particular fraud, it would be oppressive to require him to prove the case against himself on oath before any proceedings were brought. Nevertheless, these were factors to be taken into account in exercising the discretion.

13. One factor which was referred to by Gibson LJ was that in determining what were the reasonable requirements of the office-holder who was seeking the order, and whether an order should be made, great weight should be given to the views of the office-holder. The reason given was that the office-holder would have detailed knowledge of the problems that existed in relation to the state of affairs of the company and the information required. It seems to me that, in the circumstances of this case, this matter is of importance. This case is one where the winding up petitions were presented by a public body, in the public interest and at public expense. The significance of the public interest is emphasised by the large number of small investors whose investments are concerned in this case. In my view, the liquidators were wholly justified in seeking an order for examination in this case when there was such a substantial amount of stock that was missing. It would have been a dereliction of their duty, in the circumstances pertaining to these companies, if they had not pursued their enquiries to the full extent possible.

14. It is no answer, as Mr Hung tried to put forward, that Mr Chan might not be able to answer all the questions without access to the documents. As part of the judge's order Mr Chan was to be given access to the documents. If he needed more documents than were provided to answer the questions posed he could ask for them. Neither was it an objection to the making of the order that there may have been other people who would have relevant knowledge of the facts sought by the liquidators. If in the course of his examination Mr Chan were to identify such other people, no doubt orders for their examination could be sought and obtained.

15. Whilst, of course, proceedings have been brought against Mr Chan and his wife, the element of oppression constituted by the order for examination is, in my view, diminished because of the present nature of those proceedings. As has already been stated, Mr Chan, his wife and the entities with which he is connected who are defendants in the case are in the position of accounting parties. The case against them was not put on the basis of deliberate dishonesty. It is a situation, now, where the true balance owing between the various parties has to be assessed. In my view, in the circumstances of this case, there is little, if any, oppression constituted by the making of the order for examination of Mr Chan.

16. Mr Hung sought to put forward a further argument during the course of the appeal. He raised the point that Mr Chan had been arrested. He prayed this in aid, as an additional matter of oppression constituted by the order for examination. Quite apart from the fact that this matter was neither raised in the notice of appeal, nor in the skeleton arguments, in my view this point fails. Mr Chan was arrested as a result of the Commercial Crimes Bureau being notified by the SFC because an admission was made by Mr Chan in the course of his interview by the SFC.

17. In his judgment Cheung J said:

"This is, of course, not the proper forum to examine in detail each of the answers provided, but clearly the respondent must be in a position to answer in detail some of the extraordinary transactions, such as :-

1. Payment of $16 million to family members.

2. Payment of $57 million to the three companies of the respondent.

3. $99 million worth of transactions which was said to cover the faulty transactions of the staff of the three companies.

4. Payment to parties who maintained no contract with the three companies, two of these parties in fact are related to gambling casinos.

5. $5 million paid to three individuals.

As someone in control of the companies, it would be extraordinary for the respondent to provide such sketchy answers. Having considered these answers, his answer to the shortfall of the stocks of the three companies is particularly evasive. The inevitable inference is that he is deliberately refusing to answer the questions. The only way forward is to order examination of the respondent on oath on these matters."

18. In my view, there is no ground for suggesting that Cheung J applied a wrong principle of law. Still less can any suggestion be made that his decision was wholly wrong. It was not suggested that he had misunderstood any of the evidence or not comprehended the facts of the case.

19. In the circumstances, this appeal should be dismissed with an order nisi of costs in favour of the Joint Liquidators.

Hon Le Pichon JA:

20. I agree.